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Short-term stimulus will just repeat errors of the past

From Saturday's Globe and Mail

If - and it is a large if - the Bank of Canada is correct, then Canadian governments are about to make a series of mistakes, perhaps starting with the Harper government's budget on Tuesday.

The bank, like every private economist, agrees that Canada is in recession, and will remain there for at least the first part of 2009. Even if the government did nothing, it would fall into deficit, perhaps in the range of $15-billion, because of lower revenues and higher spending on social programs in poor economic times.

The bank is remarkably upbeat about 2010. Growth, it forecasts, will be almost 4 per cent in 2010, with smooth sailing thereafter. In other words, the current economic downdraft will be nasty but short.

By contrast, governments are now rushing to plan multiyear, multibillion-dollar stimulus packages, most of the money from which will hit the economy - if the bank is correct - when it won't be much needed, in 2010 and beyond. No matter how fast the money from infrastructure projects - politicians' favourites - it can't really start flowing until mid-2009, even for "shovel ready" projects. Worse, some of these "shovel ready" projects are of the wrong kind.

Take the city of Ottawa, often a leader in bad government. Two weeks ago, city council published a list of "shovel ready" projects. Most of the big-ticket items were road enlargements and paving projects in the suburbs - exactly the wrong kind for an urban area that needs to intensify growth in the inner city and build even one rapid transit system.

Not all municipalities, thank heaven, are as lacking in imagination. Still, too many of the municipal projects are either the wrong kind or will inject additional spending into the economy at the wrong time.

Quite apart from the perils of wrong timing, a massive, hurried injection of additional money for short-term economic objectives is almost certainly going to work against long-term economic needs.

In judging any stimulus measures, we should ask: Will short-term measures designed to create short-term employment, viewed five or 10 years from now, have helped our economy become more productive and environmentally sustainable?

Every interest group and every provincial and municipal government has presented its shopping list of stimulus projects, many of which meet neither the test of competitiveness nor sustainability, let alone both. Some of the proposals, such as building suburban roads, would actually make us less competitive and environmentally sustainable.

Canada inflicted the wrong kind of stimulus on itself throughout the 1970s, the prolonged period of stagflation. Desperate to promote growth, Liberal governments punctured the tax system with incentives and added all kinds of new spending that set the stage for the long period of deficits that started in 1975.

Many of these short-term measures hurt long-term productivity and put the country on the long-term deficit track. Some of them, such as regionally sensitive unemployment insurance, remain policy today; others were only stopped or trimmed years later because, once enacted, they became entitlements protected by those who benefited from them.

To put matters another way, the old cliché "from crisis comes opportunity" could apply, but only if today's stimulus produces tomorrow's gains in competitiveness and sustainability. Otherwise, we'll wind up with the worst of all worlds: stimulus that won't make much difference in the short run but that acts as a drag on the future.

The very worst short-term measures, therefore, that the Harper government could introduce are the kind it has favoured for the past three years: itsy-bitsy spending programs directed in slices of the middle-class electorate and expensive tax cuts such as the two-point reduction in the GST.

In tough times, any tax relief or social spending should be targeted very precisely at the most vulnerable. And any adjustments in existing social programs should be targeted to them.

Money from broad-based tax cuts, as we saw in the first U.S. stimulus package under George Bush, will be saved or spent on products and services, some of which come from offshore. One-time tax credits or cuts, such as the Ralph Klein $200 rebates in Alberta, will do little for stimulus now and nothing for long-term competitiveness and sustainability.

Additional incentives for retro-fitting buildings might meet those tests. Money to build or upgrade public transit, plant more trees, improve waste-water treatment; or new investment vehicles such as Green Bonds or accelerated clean technology tax credits would also meet these tests.

If the Bank of Canada is right, Canadian governments are going to lumber themselves (read taxpayers) with too much debt in the next five years, wiping out many of the hard-won fiscal gains of the past decade for the sake of short-term and perhaps ineffectual stimulus. In so doing, they will repeat the errors of the past by passing on further burdens from today's citizens to tomorrow's.

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